What will it take for the UAE to impose a VAT tax?

Published March 12th, 2015 - 08:28 GMT

The UAE remains one of the most tax-friendly destinations in the world for both expatriates and investors alike, according to a new study.

In the recently-released Paying Taxes 2015 Middle East report by World Bank Group and global auditing firm PwC, the Middle East maintains its position as the easiest place in the world in which to pay government levies, with the UAE and Qatar offering the lowest tax rates, at 14.8 per cent and 11.3 per cent, respectively.

However, analysts have said that things could change, as economies in the region face the possibility of incurring budget deficits due to the significant oil price decline and are determined to keep spending money on infrastructure projects as they have an “ambitious agenda to stimulate economic activity and enhance growth.”


“The need for diversification of government revenues in the Middle East countries, accentuated by the drop in oil prices and consequently, the drop in oil revenues, is expected to lead to the introduction of new taxes or an increase in the rates of existing taxes to help support future growth,” PwC said in a statement.

Jeanine Daou, partner and Middle East leader for indirect taxes and fiscal policy at PwC, said that the UAE in particular could seriously consider introducing the value-added tax (VAT) system as an alternative source of revenue.

Among the options available for the UAE, VAT could be a serious option as it is recognised according to international best practice as an efficient and neutral tax system,” Daou told Gulf News.

“As communicated by the UAE Ministry of Finance, the UAE have been studying the possibility of introducing a VAT system as part of a GCC study.”

Many countries around the world collect value-added tax from ordinary consumers when making small-value purchases or buying big ticket items.

The system is frowned upon in economies where a tax on individual incomes is also levied.

Within the Middle East region, one of the latest countries to implement tax reforms is Egypt, which has introduced a 10 per cent withholding tax on capital gains on shares that are privately owned or listed.

It has also imposed a 10 per cent withholding tax on dividends paid by Egyptian companies.

Under consideration

For years, the countries in the Gulf Cooperation Council (GCC) have been considering the implementation of VAT to expand their revenues and lessen their dependence on oil. A meeting was supposed to take place last month to again tackle the proposal.

“As countries in the region are looking at diversifying their sources of revenue, as well as ensuring sustainable revenue streams for the government away from hydrocarbon revenues, there seems to be a room for considering new sources of revenue notably through introducing broad base tax systems like VAT that is recognised as a robust source of revenue,” said Daou.

However, Daou said, that should GCC governments push for tax reforms, they should keep in mind that they need to remain attractive to businesses and foreign investment.

“In designing any tax policy measure, attention must be put on having simple, efficient and broad based systems. A VAT system for example needs to be relatively simple, efficient and neutral as it should avoid cascading effect and treat equally goods and services as well as apply equally at import and on local supplies,” Daou said.

“Whatever tax system the GCC countries decide to implement, it is important they try to align with best practices that are successfully applied by tax authorities around the world and be efficient and fair, and provide certainty to taxpayers.”

Daou added that it is important to keep companies “incentivized” to set up and expand their business in the region.

“Another option is for governments to review their current tax systems with the main objective of easing and reducing the cost of paying taxes for businesses. The objective being to increase the efficiency of the existing system, improve compliance and revenue collection notably through e-filing and e-auditing.”

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